Since January 1, 2006, the Ontario Business Corporations Act ("OBCA") has permitted medicine professional corporations and dentistry professional corporations to issue non-voting shares to "family members" of the physician or dentist who controls the corporation.
The OBCA defines "family member", in relation to a dentist or physician, as being the spouse, child or parent of the dentist or physician.
As I discussed in a previous blog posting, the ability to issue non-voting shares to family members allows a physician or dentist to split income with his or her family members through the payment of dividends on the shares held by the other members of the professional's family. As a result, the dividends will be taxed in the hands of the professional's family members (who presumably are subject to a lower marginal tax rate than the professional), enabling the physician or dentist to (lawfully) decrease the overall tax burden on his or her family unit by shifting income from a higher income person (and away from the higher marginal tax rate) to a lower income person, where the funds are then taxed at a lower marginal tax rate.
In the course of advising our physician and dentist clients on business issues, we are often asked whether their same sex partners or unmarried cohabiting partners qualify as "spouses" for purposes of complying with the OBCA definition of "family members", thereby enabling their professional corporations to issue shares to these persons.
This question is frequently the result of the misconception that a physician or dentist must be legally married to a person before that person becomes a "spouse", which is not the case.
The term "spouse" has many different legal meanings depending on the context involved and the legislation that applies to the particular issue at hand. Where dentistry and medicine professional corporations are concerned, the OBCA defines the term "spouse" in relation to a dentist or physician as being "a person to whom the person is married, or with whom the person is living in a conjugal relationship outside marriage".
The disjunctive "or" in this definition of "spouse" has important implications for dentists and physicians. Unfortunately, the phrase "living in a conjugal relationship" is not defined in the OBCA, and "conjugal relationship" is a concept more often associated with family law matters. So what is a conjugal relationship anyway?
Whether or not two people are living in a conjugal relationship is a question of fact, and the factors that courts will most often consider include: living arrangements, exclusivity, level of intimacy, performance of household chores, community attitude and conduct, financial interdependence, and attitude and conduct towards children (if any).[1]
These elements may be present in varying degrees and not all are necessary for the relationship to be considered conjugal.[2] Importantly, the Supreme Court of Canada[3] has also ruled that it is possible to live in a conjugal relationship without the partners having sexual relations, and that the term "spouse" cannot be restricted to heterosexual couples.
Therefore, and contrary to popular belief, unmarried physicians and dentists who are living in a conjugal relationship are entitled to cause their professional corporations to issue shares to their conjugal partners, including same sex partners.
Because a conjugal relationship means interdependency, mutual commitment and exclusivity, such a relationship obviously cannot be established immediately when two people meet. A conjugal relationship builds over a period of time, but how much time? What if the physician or dentist has been living in a conjugal relationship for a month, or two or three? At what point in time does their partner fulfill the definition of a "spouse" under the OBCA?
The OBCA understandably offers no guidance on this question - its primary focus is the regulation of business corporations in Ontario, rather than family law matters. But when a statute like the OBCA is ambiguous on point, we may look to other statutes having similar subject matter to serve as an interpretive aid to resolve ambiguity. In this case, the federal Income Tax Act defines an unmarried common law partner for tax purposes as a taxpayer who cohabitates in a conjugal relationship with someone who is the parent of their child and, if there are no children involved, the taxpayer has cohabited in a conjugal relationship for a continuous period of at least one year.
Therefore, if a physician or dentist must report himself or herself as a common law partner for tax purposes as a result of cohabiting in a conjugal relationship with a person for a period of one year (or having a child with that person), then it's probably reasonable to conclude that the physician or dentist is also a "spouse" of that person for purposes of complying with the OBCA's shareholder restrictions applicable to professional corporations.
Although the facts of each situation must be assessed individually, unmarried dentists and physicians who have combined their lives with another person (regardless of sex) in such a way that includes some or all of the characteristics of a conjugal relationship are encouraged to contact their professional advisors to discuss whether they should consider causing shares of a professional corporation to be issued to their "spouse", thereby opening the door to the tax advantages offered through splitting income with their conjugal partners.
The foregoing provides an overview only. Readers are cautioned against making any decision based on this material alone. Rather, a qualified lawyer should be consulted.
[1] See Molodowich v. Penttinen (1980), 17 R.F.L. (3d) 376, at 381-382 (Ont. Dist. Ct.).
[2] See M. v. H., 1999 SCC.
[3] Ibid.
